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THE BUILDING BLOCKS
Unfavorable Trusts
Favorable Trusts
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Divorce Protection
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Equity Separation
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  Divorce Protection

 

Was there ever a more compelling member of America's new business elite than John “Jack” F. Welch Jr., the former chairman and chief executive of General Electric, the blue-chip enterprise that became a growth stock under his tutelage?

 

 

 

 

Not only a business leader, the charismatic Welch mesmerized talk show hosts, gave riveting speeches, was the topic of books, and even authored best-selling books.

 

 

It is not surprising that Suzy Wetlaufer, editor of the Harvard Business Review, found him first a compelling topic, and then a compelling mate. According to legend, Mrs. Welch knew about her husband's affair with Wetlaufer behind the ivied walls, but chose to bide her time. Jane Beasley Welch quietly waited for a prenuptial agreement to expire before filing for divorce.

 

 

 

With a will that matched her patience, Mrs. Welch rejected the multimillion-dollar divorce court peace offering of Jack Welch Jr. Instead, she had her legal team draft a court document detailing all the perquisites that G.E. promised Welch, by then retired, for the rest of his life.

 

 

 

When the information was released, the expression an “embarrassment of riches” had a new ring. There for the public (and shareholders) to see was Welch's lifetime use of a Manhattan condo, charge accounts at swank restaurants, the best seats at major sporting events, and sundry other costs associated with his New York pad, including satellite TV for four other homes, all at shareholder expense. 

 

 

Welch settled with his wife, and everybody learned a lesson: A person cannot plan far enough in advance when getting married. Almost anything is public in divorce court.  For our clients, this is especially true. But there is little avoiding it. More than one-half of marriages end in divorce. And on marriage number two? The divorce rate is even higher.

 

 

 

As a successful individual, you cannot afford to get married without having prenuptial agreements in place, executed by the best lawyers and financial experts you can find. If you properly prepare for the worst, then you will not be tempted to lie, hide assets, or generate even further ill will in the divorce process. When the spouses lay their cards on the table in the beginning, there is absolutely no need for anything to be hidden later. 

 

 

 

You Own it Together in These States

 

Nine states have community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico Texas, Washington, and Wisconsin. If you divorce inside those states without a clear-cut prenuptial agreement, the law says “split it down the middle,” as to any gains made during marriage (excluding inheritances, or gifts explicitly to one spouse).

 

 

It May Be Worse in Other States

 

The remaining states are called equitable distribution states, and in these states, a court—meaning a judge, a human being with limited time and all the foibles of any other human being—has total discretion on how much to give to your soon-to-be ex-spouse.

 

 

 

Most of the time the criteria included the length of the marriage, the “conduct“ of the parties, and the present earnings and future earnings potential of each former spouse.

 

 

The Answer: The Prenuptial Agreement

 

Before you are married, under close advisement of your lawyers and financial planners, draft a prenuptial agreement that fully discloses and address all assets, both marital and separate. Marital asset agreements have numerous functions: allocating allocate pre-marital property and debt, protecting yourself from your spouse’s pre-marriage debt, providing for children from first and subsequent marriages, and the like. But among the overlooked function of a marital agreement is its ability to discover the other spouse’s goals, expectations, and promises regarding the union.

 

 

 

A prenuptial agreement, also known as a premarital or ante nuptial agreement, is a contract entered into between a couple engaged to be married that specifies the distribution of property, alimony and other monetary issues in the event of a divorce.  Typically, prenuptial agreements do not control issues like child custody, child support, or visitation.

 

 

 

The regulation of prenuptial agreements varies dramatically from state to state. Generally speaking, however, most states will enforce prenuptial agreements if they comply with the laws governing contracts. In other words, if the parties voluntarily enter into a prenuptial agreement that is not unfairly one-sided, no fraud, duress or coercion is used, and the parties exchange all relevant information regarding their assets, then the agreement will generally be upheld by the court. However, if the provisions made for one spouse are disproportionate to the extent and value of the other spouse’s estate, the presumption is raised that the wealthy spouse intentionally concealed assets, and the burden shifts to that spouse to show that the other had full knowledge of the property in the estate.

 

 

 

While one of the goals of asset protection is to keep assets out of “discovery,” you must never engage in any prevarication when creating pre- and postnuptial agreements. Lying about or hiding assets will nullify all your attempts to protect yourself with otherwise effective legal agreements.

 

 

 

A post-nuptial agreement is a contract between spouses similar to a prenuptial agreement except it is signed after the marriage ceremony. Though post-nuptials are increasingly hard to enforce, two basic rules should be followed to improve the likelihood of an enforceable agreement: 1) Engage in full and fair disclosure; and 2) hire separate and independent counsel.

 

 

 

Pros of Pre- and Post Nuptial Agreements

 

Traditionally, more than a few of my more conventional clients or their spouses are opposed to the idea of a marital agreement. Their primary objection is that by virtue of preparing for a divorce, they are accepting that divorce might happen. Arguing against this is fruitless, so instead, I offer evidence that pre- and post-nuptial agreements often can be used to strengthen a pending or existing marriage.

 

 

 

Consider, of course, that a pre- or post-nuptial marriage worth its weight in salt should address how the following will be handled in the event of death or divorce:

 

 

 

·         Disposition of all assets, liabilities, income, and expected gifts and inheritances.

 

·         How post-marital debts will be paid.

 

·         How appreciation, gains, income, rentals, dividends and other proceeds of property will be distributed

 

·         Who will own the marital residence and secondary home(s).

 

·         The status of gifts, inheritances, and trusts either spouse receives or benefits from, whether before or after marriage.

 

·         What will happen to various categories of property, such as real estate, artwork, and jewelry.

 

·         Who and whether provisions will be made for alimony, maintenance, or spousal support, or for a waiver or property settlement instead of support (to the extent allowable by law).

 

·         Contain agreements as to estate planning for both spouses, should the marriage end in death rather than divorce.

 

·         Provide for medical, disability, life or long-term-care insurance coverage.

 

 

 

Now consider that discussions into these matters will also include:

 

 

 

·         Identification of separate versus joint property, including the distinction of separate business holdings that exist outside the marriage.

 

·         Discovery of each partner’s current financial status. In joining your life with someone else, shouldn’t you fully disclose your debts, assets, and holdings? And shouldn’t your betrothed do the same?

 

·         Agreement as to who will handle, and in what way, the couple’s financial holdings.

 

o        Who will pay the household bills, and with what money?

 

o        Should the couple have joint accounts, and if so, how to manage them?

 

o        What purchases (house, cars, businesses) will the couple embark on together, and what will be handled by separate businesses that exist outside the marriage?

 

o        How will the couple handle credit card charges?

 

o        How much, and in what way, will money be saved?

 

o        How will the couple file tax returns? Will they be filed jointly? How will income be allocated and deductions assigned?

 

·         Evaluation of how the couple will dispose its assets in the event of one person’s death.

 

·         Procedure for filing tax returns, including how income will be allocated and deductions assigned.

 

·         Discovery of each couple’s philosophy and expectations regarding money, values, philanthropy, productivity.

 

 

 

When considering the pros and cons of pre- and post-nuptial agreements, you will have to address how the assets will be divided in the event of death or divorce (the first set of bullet points). However, it is perhaps more important to focus on the second set of bullet points, which consider how the couple will address finances while married. When thought of in these terms, marital agreements become more about strengthening a relationship by establishing expectations than they do about preparing for divorce.

 

 

 

What Is Legal in a Prenuptial Agreement?

 

Prenuptial agreements are not one-size-fits all. You can decide in advance to split property evenly, or you can make a clear distinction between marital assets and individual assets.

 

 

 

The details of what is legal in a prenuptial agreement vary from state to state, but some consistencies are worth noting.

 

 

 

·         The agreement must be on paper, and signed. Often, the document must also be witnessed and/or notarized. Get it notarized in any case—avoid later charges that the document was signed under duress or the signature was forged. Some lawyers even advise videotaping the signing ceremony.

 

 

 

·         Each party must provide a clean and accurate disclosure of his or her financial condition. Do not skimp, attempt to hide assets, or otherwise fail to communicate the full picture, or you will suffer in the event of divorce. Be accurate, attach financial statements to the prenuptial agreement, and have both parties attest they have seen and understand those statements.

 

 

 

·         Each party must have his or her own attorney. Make sure your spouse hires his or her own attorney, and that you play no role in that process. Some courts in some states may rule that your spouse was improperly advised if you help arrange for his or her attorney.

 

 

 

·         Sign all the prenuptial agreements well in advance of the wedding ceremony. Indeed, it may be a good idea to refrain from setting a wedding date until the prenuptial agreement is signed. Some courts have ruled that a pending marriage is enough to constitute that a prenuptials was signed “under duress,” which can nullify the agreement.

 

 

 

·         The couple must follow the prenuptial agreements during the marriage. Courts have disregarded pre-nuptials when the agreement is blatantly violated during the marriage, such as when property designated as the wife’s separate property is re-titled to the husband for tax purposes. The rule: If you separate property in the prenuptial, keep it separated in marriage. You might unravel the fabric of the agreement, in the eyes of a judge.

 

 

 

 

 

Even if all the rules are followed, prenuptial agreements are tricky terrain. For example, courts have ruled that prenuptial agreements must not be “unconscionable” or “one-sided.” For the ultra-wealthy, this can be a landmine.

 

 

 

If you agree to a 50/50 split, you may find one day that the spouse you suspect (but cannot prove) is unfaithful can take half of what you made in the last ten years since the marriage—money you earned while your spouse was having an affair. On the other hand, too small a fraction may incur the ire of a crusading judge. It is a tough call, so be sure to consult with your lawyer closely on this one.

 

 

 

Rule of Thumb

 

If a couple separates property in a prenuptial agreement, the property should be kept separate in marriage. Otherwise, you might unwittingly unravel the fabric of the prenuptial agreement.

 

 

 

One significant downside of a traditional prenuptial arrangement is that it relies on the parties to keep separate property isolated. Combining bank accounts, depositing separate property into the other spouse’s account, or making separate property available to the spouse might nullify the prenuptial agreement.

 

 

 

To guard against this, some couples structure their separate property using Stealth Prenups™,[1] which can also be used if couples find themselves at a standstill when it comes to the discussion of nuptial agreements. A Stealth Prenup™ is used in lieu of a prenuptial agreement for stronger asset protection or in the event one spouse is unwilling to discuss or sign a prenuptial agreement.

 

 

 

The Stealth Prenup™ arrangements rely on integrated legal structures established to isolate and protect non-marital property, accomplishing an asset protection plan that is as strong as or stronger than a prenuptial agreement. By taking the components of asset protection—namely business entities, and trusts—a spouse can segregate separate assets, making them untouchable in the event of divorce.

 

 

 

 

 

There are variations to the theme, but the Stealth Prenup™ generally designed as follows.

 

 

 

Prior to the marriage, the soon-to-be-spouse with the separate property sets up a limited partnership, which holds all non-marital assets. The general partner is a domestic corporation owned by the spouse with assets. The general partner owns very little of the limited partnership (2 percent, for example).

 

 

 

The limited partner is a foreign asset protection trust, the majority owner. If drafted properly, this trust is impossible for a disgruntled ex-spouse to pierce.

 



 

XYZ Corp

(C Corp)

 

1% General Partner

 

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Stealth Nup, L.P.

holds the non-marital, separate property

 

 

XYZ Trust,

a FAPT

 

99% Limited Partner

 

 

 

 

 

The spouse with the assets discloses his or her ownership of the corporation (in this case, XYZ Corp) prior to marriage. Remember, that courts look unfavorably upon spouses who do not provide full disclosure of assets prior to marriage. However, this structure accomplishes two things: 1) It establishes separate property as business property instead of personal property; and 2) if dissolved, it places 98 percent of separate assets into a foreign asset protection trust, the hardest-to-reach structure of all.

 



 

 

Case Study

 

Joyce Whitmore is the general partner for a few of the Whitmore family limited partnerships. She owns other investments on her own. Before marrying Ryan Thompson, Joyce identifies her non-marital property, using the following structure to isolate non-marital assets from the couple’s marriage: 

 

 

 

To withstand the scrutiny of the court system, Joyce’s complete ownership in JW SP, Inc. (the 1 percent general partner) is fully disclosed prior to her marriage to Ryan.

 

 

 

A few years later, when Ryan loses a lawsuit, Joyce’s non-marital business holdings are now completely protected from Ryan’s creditors. And when Joyce and Ryan divorce years later, the non-marital assets she owned previously and placed in Stealth Prenup, LP are not considered part of the couple’s joint estate.

 

 

The strength of placing non-marital property inside an irrevocable trust is that you no longer own the property. You have transferred the assets in question, with no strings attached. As we learned in the section on trusts, because you neither own nor control the specified assets, your creditors, including an ex-spouse, cannot claim those assets. They can, however, be used for beneficiary support.

 

 

 

With divorce so prevalent, a key feature of a trust is that you can dictate that assets stay within the family. You can designate that children, grandchildren, and even future great-grandchildren are beneficiaries of an irrevocable trust.

 

 

 

The trust should be explicitly drafted so that the beneficiary’s creditors, including divorcing ex-spouses, have no claims on trust assets or income. Keep in special “spendthrift” provisions to protect trust assets, income, and even wayward youths from their own misbehavior. (A reminder: Spendthrift provisions can prevent disbursement to children's creditors, and they can also limit payments to children).

 

 

 

An irrevocable trust is a strong castle against legal-financial attack, but it is indeed irrevocable. You cannot change your mind later, and you have given up real control of the trust to the trustee.

 

 

 

 

The Family Business

 

Few enterprises in life are as enriching as a family business, and, of course, for a lot more reasons than just money. Yet after toiling for years to build a business (and possibly preparing to hand it off to offspring), divorce can threaten everything. It need not be only the founder’s divorce to cause heart-wrenching turmoil. A son or daughter could enter a poorly considered marriage with a soon-to-be ex-spouse who wants half your child’s share in the family business.

 

 

 

Of the many ugly features of divorce is the “discovery” process in court. The ex-spouses attorneys demand to see all aspects of the business, including all assets, salaries for family members, benefits, and contracts. Having prenuptial agreements in place clearly specifies the family business is off-limits in the event of a divorce. Specify a money settlement instead. Remember, a family business is more than money. Money can be recouped, but a family business that is torn asunder may never be the same. 

 

 

Protect Your Children, Even If They Don’t Want It

 

Talk about throwing cold water on warm feelings: How about asking your children if they have signed prenuptial agreements before they get married?

 

 

 

This sounds unfriendly, to say the least, but keep in mind that if your children commingle their assets (the assets you provide for them) with spouses, divorce courts get extra-ugly, as your offspring bow before a strange judge and tussle with opposing counsel over disposition of assets.

 

 

 

One way to sidestep all of this is to create an irrevocable trust, which clearly details the assets you are providing for your children. You need no one’s approval to do this, and by leaving assets to your children’s irrevocable trusts with solid spendthrift caveats, you have protected your assets from your children’s spouses. (Of course, money taken out of the trust and used to buy common property, such as a house, is no longer necessarily protected, but at least what is inside the trust remains whole in any event.)

 

 

 

A trust that dispenses only annual payments has advantages. If a child marries and then divorces, the ex-spouse has no claim at all on the remaining trust corpus. If income from the trust was used to buy a house, for example, that house may be up for grabs in divorce court, but not the remaining trust assets.

 

 

 

The End Result

 

We know that no one is happy in getting divorced, and that starting a marriage with a prenuptial agreement is not romantic.  But unhappiness can turn into misery if a vengeful ex-spouse uses divorce court to wreak havoc. Family business have been ruined, and real estate assets built up over generations have been dissipated, all because spouses failed to execute simple, but important, documents that courts will uphold, even if the court is run by a judge with foibles.



 

[1] Stealth Prenup™ is trademarked by Thomas J. Handler, Esq., a managing principal of Handler, Thayer, & Duggan, LLC, located at 191 North Wacker Drive, 23rd Floor Chicago, Illinois 60606-1633. Handler can be reached at (312) 641-2100.

 

 

 
     
 
 
 
     
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